Curriculum·R403 Risk Management as the Actual Product·about 42 min
The position sizing formula
By the end of this lesson you can
- →Apply the sizing formula and state which three inputs it needs
- →Compute the second constraint, which is the size the market can absorb
- →Show why the binding constraint is usually capacity rather than risk budget
- →Convert a position into the number of days it takes to exit
Senior · enrolled learners
This lesson opens with Amaranth Advisors, September 2006.
- What happened
- Amaranth Advisors held concentrated natural gas positions built by a single trader around calendar spreads between winter and summer delivery months, using leverage up to around five times assets under management and large over-the-counter derivative positions alongside exchange-traded futures. The fund's positions were very large relative to the prevailing open interest in the exchange-traded market. Natural gas fell from around $8 in mid-July 2006 to around $5 by September as storage filled and the seasonal pattern the spreads depended on did not appear. On 19 September 2006 the fund disclosed losses of about $6.6B against roughly $9.25B of assets, most of it incurred in a single week, and it wound down.
- The decision point
- The thesis was not absurd and the trader was experienced. The position was larger than the market it was held in, which meant there was no size at which it could be reduced without moving the price against the remainder. A position you cannot exit is not a position with a stop loss, whatever the stop says, so the second sizing constraint is not the risk budget. It is what the market will absorb from you.
- Recorded loss
- $6,600,000,000
What you will be able to answer
- →What is the sizing formula?
- →What is the second constraint?
- →How do you convert size into days to exit?
- →What did Amaranth lose?
Orientation and Year One are open: anyone can read them without an account. From Year Two onward the lessons are for enrolled learners, because progress through the later years only means anything if it is tracked against a record.
It is free. We do not sell the list and there is nothing to buy at the end of it.
Sources and review
- https://en.wikipedia.org/wiki/Amaranth_Advisors
- https://en.wikipedia.org/wiki/Brian_Hunter_(trader)
- https://thehedgefundjournal.com/amaranth-advisors/
- https://naturalgasintel.com/news/cftc-says-amaranth-former-trader-tried-to-manipulate-market/
Confidence medium·Volatility low·Reviewed 2026-08-07·Owner unassigned
Contested
Amaranth's loss is reported as about $6B, about $6.5B for a single week and about $6.6B in total, against assets variously stated as $9.25B and around $9.5B. Roughly two thirds and roughly 71 percent are both used in the literature. The precision does not affect the argument and the figures used here are stated as reported.
The CFTC subsequently brought an attempted manipulation action relating to the trading. This lesson uses the case only as a sizing failure and takes no position on the manipulation allegations, which are a separate matter with their own record.
R402-03 established that loss equals size times distance. This lesson turns that into a size. R403-05 owns aggregating sizes across positions. Keep the split.